Strategically long EUR & still favouring JPY as a macro hedge

Currency strategy

Strategically long EUR & still favouring JPY as a macro hedge

The overall framework – based on rate differential, carry-to-risk and economic surprises – is negative for the US dollar, which has seen some weakness in recent months. With the greenback continuing to weaken (notwithstanding the recent bounce back), the Euro has recently gained some appeal amongst foreign investors. With acceleration in the activity cycle, better macro-economic indicators and a central bank that looks set to taper its QE, the long Euro trade could still have legs. However, we aim to manage the exposure in a tactical manner as the trade remains vulnerable to central bank communications, especially with the uncertainty surrounding the Federal Reserve and the unease mentioned by some ECB board members after the recent appreciation of the common currency. Indeed a new hawkish Fed governor could initiate a re-pricing of market expectations to temporarily support the US Dollar.

Though rate differentials remain penalizing, the Yen – based on our long-term framework – appears attractive. In the current environment of geopolitical uncertainty and the heavy dose of event risk present, the Yen remains an attractive safe haven and a diversifying asset.

We remain constructive EMFX over the medium term. EMFX rebounded in 2017 on a solid EM growth momentum, attractive long-term valuations and a more synchronized global growth extending to the Eurozone and Japan. We expect this trend to continue, notwithstanding some volatility around monetary-policy normalization and balance-sheet unwinds in core markets like the US and the Eurozone.

Overall, we hold a tactical overweight (OW) position in EMFX of oil exporters to benefit from the rebound in oil. We are overweight the COP, RUB and KZT on expectations that commodity FX will outperform the rest of the universe. We hold an overweight in IDR on good carry-to-volatility and improving trade term. We retain a OW in Central and Eastern European currencies (with the exception of the RON) on stellar growth dynamics and an expected shift towards a more hawkish rhetoric from central banks.